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Equity Bottom-Up

Washington H. Soul Pattinson and Co. Ltd / Equity Bottom-Up

Washington H. Soul Pattinson and Co. Ltd (SOL AU)

We lower our fair value estimate for Soul Pattinson to AUD 14.50 from AUD 15.00 per share after taking into account the reduction in our fair value estimate for 25.5%-owned <a href="https://www.smartkarma.com/entities/323" target="_blank" data-smartkarma-citation="entities:323:1">TPG Telecom Ltd (TPM AU)</a>. Soul Pattinson’s shareholding in TPG Telecom makes up 36% of our sum-of-the-parts fair value estimate. We have cut our fair value estimate for TPG Telecom by 18% to AUD 6.60 per share. Approximately 8% of the cut is due to dilution from the AUD 400 million rights issue, priced at AUD 5.25 per share, and the remainder is due to our view that TPG’s plan to become Australia’s fourth mobile network is likely to be value-destructive. See <a href="https://www.smartkarma.com/insights/tpg-telecom-s-unwelcome-easter-present-to-mobile-incumbents-fair-value-estimate-cut-to-aud-6-60" target="_blank" data-smartkarma-citation="insights:10106">TPG Telecom’s Unwelcome Easter Present to Mobile Incumbents; Fair Value Estimate Cut to AUD 6.60</a> for more detail.Further recent share price appreciation and our lower fair value estimate see Soul Pattinson shares trading about 30% above the sum of the underlying parts. While fiscal 2017 earnings should be strong, meaningful future growth will be difficult, given that New Hope is benefiting from elevated coal prices, which should fall in the medium term, and TPG faces headwinds due to the margin-crunching impact of the national broadband network and the rollout of its mobile networks in the already-competitive Australian and Singaporean markets. At the current price of AUD 19 per share, Soul Pattinson trades on a relatively stingy forecast fiscal 2017 dividend of 2.9%, fully franked.Analyst: Matthew Hodge

We lower our fair value estimate for Soul Pattinson to AUD 14.50 from AUD 15.00 per share after taking into account the reduction in our fair value estimate for 25.5%-owned TPG Telecom Ltd (TPM AU). Soul Pattinson’s shareholding in TPG Telecom makes up 36% of our sum-of-the-parts fair value estimate. We have cut our fair value estimate for TPG Telecom by 18% to AUD 6.60 per share. Approximately 8% of the cut is due to dilution from the AUD 400 million rights issue, priced at AUD 5.25 per share, and the remainder is due to our view that TPG’s plan to become Australia’s fourth mobile network is likely to be value-destructive. See TPG Telecom’s Unwelcome Easter Present to Mobile Incumbents; Fair Value Estimate Cut to AUD 6.60 for more detail.Further recent share price appreciation and our lower fair value estimate see Soul Pattinson shares trading about 30% above the sum of the underlying parts. While fiscal 2017 earnings should be strong, meaningful future growth will be difficult, given that New Hope is benefiting from elevated coal prices, which should fall in the medium term, and TPG faces headwinds due to the margin-crunching impact of the national broadband network and the rollout of its mobile networks in the already-competitive Australian and Singaporean markets. At the current price of AUD 19 per share, Soul Pattinson trades on a relatively stingy forecast fiscal 2017 dividend of 2.9%, fully franked.Analyst: Matthew Hodge

Lowering Soul Pattinson's FVE, With Jury Out on TPG Telecom's Bold Move Into Mobile